Italy faces budget choice after remaining under EU deficit procedure

Traders Union
All News
Financial News
Italy faces EU budget choice

Highlights

Italy’s deficit remains at 3.1 per cent for 2025, exceeding the EU ceiling and preventing early exit from the excessive deficit procedure.
Italy seeks EU budget flexibility to increase spending by up to 1.5 per cent of GDP annually through 2028, potentially allocating 14 billion euros to energy and 21 billion euros to defence.
Utilizing this flexibility would keep Italy above the 3 per cent deficit threshold, prolonging EU supervision and challenging Meloni's economic credibility during an election period.

Deficit review complicates Italy’s spending plan

As reported by Financial Times, a review published yesterday confirms that Italy’s deficit stands at 3.1 per cent in 2025, above the EU-mandated ceiling, frustrating Meloni’s effort to remove the country from Brussels’ excessive deficit procedure.

Italy has been in breach of EU fiscal rules since 2024, with the bloc requiring deficits to remain within 3 per cent of GDP and debt-to-GDP ratios below 60 per cent. Finance minister Giancarlo Giorgetti expresses “regret” that Italy “will not exit the excess deficit procedure early as we had hoped”, but says the government is planning to leave the regime in 2027.

The outcome creates a political and fiscal trade-off for Rome. Earlier this month, Italy requests activation of EU budget flexibility that would let it raise spending above previously agreed limits by up to 1.5 per cent of GDP a year until 2028, provided the additional outlays are directed to defence and energy security.

Election-year pressure and market implications

Using that flexibility could allow Italy to spend as much as 14 billion euros on energy-related measures in 2027 and 2028, a period of high energy prices and an important electoral backdrop. It could also permit roughly 21 billion euros of additional defence spending, according to Osservatorio dei Conti Pubblici.

But tapping the extra room would also keep Italy above the 3 per cent deficit threshold, effectively postponing any hope of exiting the excessive deficit procedure. For Meloni, that risks undermining a central economic claim of her government, that Italy has improved its standing with financial markets through credit rating upgrades and a relatively narrow spread over German debt.

Opposition parties seize on the latest figures as evidence that the government’s economic strategy is failing households. Giuseppe Conte, leader of the Five Star Movement, says the data shows that “four years of cuts and austerity, zero growth, record tax pressure, a rush to rearmament” have left Italy “trapped in a cage”, while an EU official says policymakers “need to decide what’s more important.”

In our earlier article on oil prices becoming a more important signal for ECB policy, we explained how higher energy costs were increasingly influencing market expectations for further rate hikes, even as officials stressed a broader, data-driven approach. We also highlighted the debate within the ECB over how directly energy prices should feed into tightening decisions and the emphasis on retaining flexibility meeting by meeting.

This material may contain third-party opinions, none of the data and information on this webpage constitutes investment advice according to our Disclaimer. While we adhere to strict Editorial Integrity, this post may contain references to products from our partners.